Currency Hedging Case Study

2.0 Pros and cons of hedging

Currency hedging

First, according to Leveque, Kokenge and Rhodes (2013) and Western Union Holdings Inc. (n.d.), financial investors and business used currency hedging to minimize the risk they might be suffered when conducting business internationally. Some said, hedging can be connected to an insurance policy which minimizes the effect of foreign exchange risks. Besides, currency hedging enables an investors to minimize and direct the risk engaged in foreign investment, as well as reduce the losses. Also, it can be used to protect the value of the foreign currency cash flows of a multinational company by allowing hedgers or investors to reduce the impact of foreign exchange risks (Thinking Made Easy, 2010).

Although

It is not a good strategy for beginner investors as it is quite opaque. They will suffer losses if they cannot follow the strategies appropriately. Last, if you though that currency hedging is riskless, than currency hedging can be an investment snare to you (Western Union Holdings Inc., n.d.). According to Ghosh et al. (2013), hedging helps to transform risks but not eradicate the risks. It is hence acts as an integral part of risk management. Hedging does not means that you are guaranteed from facing a loss, it can be result in enormous losses as

This is because every company has different credit rating and hence borrow at different cost. IRS helps to monitor the mix of fixed and floating rate interest in the company’s debt mix as well. A company may want to change from borrowing at a floating rate to borrowing at fixed rates if interest rate are expected to increase, vice versa.

Besides, when the company seldom access to capital market, either due to its low credit rating or it is relatively obscure in the market, IRS helps to obtain fixed rate borrowing commitments by swapping floating interest rate by fixed rate of interest. In addition, it can provide a longer period protection against interest rate movement than other method as the interest rate swaps can be planned up for ten years. IRS involved a low transaction cost even it is tailor made. Last, there is no upfront payment in IRS (Sundar, 2012).

The major problem of IRS is that Swaps do not allow purchasers or sellers to gain in favorable interest rate movements and restrict any downside losses. Also, it engaged credit risk, also called as default risk, and market risk. Last, two initial parties had accepted credit status of each other, and the purchaser of the swap may not be acceptable to the original counterparty (Sundar,